Wells Fargo merger rumors heat up

Edward Iwata, OF THE EXAMINER STAFF

Published 4:00 am, Friday, September 8, 1995

1995-09-08 04:00:00 PDT WEST -- The long flirtation between two regional banking giants - Wells Fargo & Co. in San Francisco and First Interstate Bancorp. in Los Angeles - may turn into a megamerger soon, a top analyst predicted Friday.

A possible deal between the second- and third-largest banks in California fell apart last year. But brutal competition in the banking industry, a hot market for bank stocks and impatient investors have put sharp pressure on banks to merge.

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Speculation of the merger lit a fire under the stock of both banks. In late afternoon trading Friday, First Interstate Bancorp was up 3-1/8 to 99-1/2 on the New York Stock Exchange. Wells Fargo gained 1-3/8 to 186-5/8, also on the NYSE.

A merger of the two large regional banks would create a banking giant with $107 billion in assets. The new entity would still trail BankAmerica Corp. with $227 billion in assets.

Based on talks this week with Wells Fargo management, Salem speculated the bank might pay $120 a share for First Interstate.

A merger would pump up Wells Fargo's 1997 earnings by 15 percent, Salem predicted. And Wells Fargo's shares could run as high as $250 a share in 12 to 18 months after a deal.

Corporate spokeswomen Lorna Doubet at Wells Fargo and Shirley Hosoi of First Interstate said the banks do not comment on speculation over deals.

For months, analysts and investors have said that a deal between the two banks makes great strategic and market sense.

Industry watchers said the recent explosion of big deals in the shrinking banking industry may pave the way for a transaction between Wells Fargo, the nation's 17th-largest bank, and First Interstate, the 14th largest.

"Last year, a merger seemed like a radical idea," said Jim Schmidt of Boston-based Hancock Securities, a large investor in First Interstate stock. "But all of a sudden, a deal now makes a lot of sense. The investment community would love to see this happen."

In recent weeks, Chemical Banking Corp. and Chase Manhattan announced a $10 billion merger, while NationsBank Corp. said it will buy Bank South Corp. for $1.6 billion.

Industry watchers said a merger would be a nearly perfect strategic fit. First Interstate runs 1,100 branches in 13 states throughout the West, while Wells Fargo operates 600 branches in California.

"First Interstate is a heck of a franchise," said John Billings of Freedman, Billings, Ramsey, a research firm and investment bank in Arlington, Va. "It's got a strong management team and a strong market."

Billings added: "Its stock is cheap, a sleeper. A lot of people are trying to get in now."

Salem said that most of Wells Fargo's recent gains have not come from surging revenues and profits, but from stock buybacks and reductions in loan-loss provisions.